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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Unrolling U.S. Office Products
<% ' AvantGo:FoolPlate %>At one point U.S. Office Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OFIS)") else Response.Write("(Nasdaq: OFIS)") end if %>, an office supply "roll-up" brought to you, as they say... from the mind of Jonathan Ledecky, sported a pretty hefty market capitalization (on the order of $3-and-a-half billion dollars). Today, the company is positioned far below its former lofty perch, and due to an earnings shortfall pre-announcement after the bell yesterday, U.S. Office Products sank $1 11/16 to $6 15/16 this morning on over three times its 30 day average volume. Currently U.S. Office Products trades at 0.32 times "intangible" adjusted invested capital to market capitalization, which is interesting because the firm has accumulated $903 million in "intangibles" (again, these are post-recapitalization numbers).
After Ledecky made for the exit this past summer, the firm was involved in a spin-off of four subsidiaries under the stewardship of Clayton, Dubilier & Rice, including the company's travel, school supplies, technology services, and print management businesses. Presently U.S. Office Products is involved in office supplies, furniture, coffee supplies, Mail Boxes Etc., and certain international operations.
With the restructuring done, U.S. Office Products was said to be "free" to finally focus all of its attention on the task of consolidating its operations and improving operating margins. It seems like Ledecky got to do the easy part. The common "knocks" against roll-ups are that management is more inclined toward financial engineering than building a company, and they need lofty stock prices in order to conduct public/private arbitrage (12 times average cash flow in the go-go Ledecky years, purchasing private companies at 6 times cash flow). But at some point, roll-ups need to execute on the operations front if they've neglected it along the way under the guise of giving the acquired "Mom and Pop" businesses autonomy.
The company said it expects to breakeven in the second quarter, before charges, which is shy of average EPS estimates of $0.06. The company also said it sees earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter of $43 million (before charges), which is $4-$5 million below analysts' projections. For the year, U.S. Office Products expects EBITDA of roughly $175-$185 million, which is 7-13% below expectations. Interestingly, along with the SEC's release of SAB No. 97 (to try and clamp down on transactions involving asset transfers from shareholders to other companies at the same time as public offerings), roll-ups in general did a good job of talking investors into looking at cash flows rather than goodwill adjusted earnings. U.S. Office Products still trades at a healthy 2.3 times cash flow, but if it can accelerate its back-end consolidation (warehouses to district fulfillment centers) it might still not be completely derailed on the cash earnings front in 1999.<% ' AvantGo:End %>
<% ' AvantGo:Ups %>Let the puns begin... Entertainment and consumer products retailer and direct marketer K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> bunny-hopped -- OK, more like surged -- up $6 15/16 to $13 13/16 after it announced a partnership with Playboy Online (you can find that link yourself, folks) to create a co-branded online music store within Playboy.com. The "Playboy/K-tel Music Store'' is expected to be ready for holiday shoppers. Hef's empire, Playboy Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLA)") else Response.Write("(NYSE: PLA)") end if %>, wiggled up $7/8 to $15 11/16.
Removable media storage company Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> advanced $1 1/4, or 21.7%, to $7 after it announced plans to expand the market presence of its high-density Zip drives beyond personal computers. Zip drives are now being built into or made compatible with printers, scanners, set-top boxes, projection systems, music and audio devices, and medical devices. As noted in yesterday's Fool Port report, Iomega also got a boost when rival Syquest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SYQT)") else Response.Write("(NYSE: SYQT)") end if %> announced that it has suspended operations and may file for bankruptcy protection. Syquest stock has stopped trading.
Biotechnology company SangStat Medical's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SANG)") else Response.Write("(Nasdaq: SANG)") end if %> investors were positively singing today, as their stock jumped $3 1/8 to $24 3/4 after the company said it has won FDA approval to market SangCya for preventing rejection of organ transplants. SangCya will be the first generic competitor to Novartis AG's immunosuppressive drug cyclosporine in a $1.3 billion market. Gensia Sicor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNSA)") else Response.Write("(Nasdaq: GNSA)") end if %>, which added $5/16 to $4 1/8, will be the primary manufacturer of the cyclosporine bulk drug substance used by SangStat to make the drug.
Insurance giant Cigna <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CI)") else Response.Write("(NYSE: CI)") end if %> moved up $1 5/16 to $75 15/16 after reporting Q3 operating earnings of $1.14 a share (including $44 million in after-tax catastrophe losses) compared with $1.17 last year and analysts' mean estimate of $1.12. Total revenues increased 0.8% to $5.23 billion from $5.18 billion.
Investors appeared happy to see some changes atop consumer and business services company Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %>, which rose $3/16 to $12 1/16 after it said it has named CFO Michael Monaco CEO of its Alliance Marketing Division late yesterday. Replacing Monaco as CFO is David Johnson, previously executive vice president of finance. Top Alliance Marketing officials, including the division's president and CFO, have been reassigned to head other units.
Online retailer CyberShop International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYSP)") else Response.Write("(Nasdaq: CYSP)") end if %> pocketed a gain of $1/2 to $8 5/8 after it announced a Q3 loss of $0.15 a share, wider than last year's loss of $0.08 but better than the Street's projected loss of $0.19. Cybershop held the line on operating expenses even as it upgraded technology, relocated offices, and hired more employees.
Contract pharmaceutical research outsourcer and consulting firm Parexel International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRXL)") else Response.Write("(Nasdaq: PRXL)") end if %> popped up $2 1/8 to $25 3/8 after Salomon Smith Barney upgraded it to "outperform" from "neutral." Parexel reported fiscal Q1 EPS of $0.22 versus $0.18 a year ago, $0.02 shy of the Street's mean estimate, late last week.
Pharmaceutical developer Trimeris Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRMS)") else Response.Write("(Nasdaq: TRMS)") end if %> rocketed ahead $4 3/4, or 97.4%, to $9 5/8 after it reported that T-20, an experimental anti-HIV treatment it is developing, had a similar short-term effect on the spread of HIV to the three- and four-drug treatment "cocktails" now in use, according to the preliminary results of a 16-person study. The T-20 protein inhibits the ability of the virus to enter cells, a different approach from commonly available HIV treatments.
Microcomputer products distributor CHS Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> jumped $2 3/8 to $14 after reporting Q3 EPS of $0.41, up from $0.26 a year ago and $0.02 ahead of expectations.
Vlasic Foods International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VL)") else Response.Write("(NYSE: VL)") end if %> rose $15/16 to $19 7/16 after Merrill Lynch raised its near-term rating on the pickles and frozen foods maker to "accumulate" from "neutral," saying that the company's products are being well received and that it's on the verge of building strong double-digit earnings growth.
Water purification and treatment systems developer U.S. Filter Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USF)") else Response.Write("(NYSE: USF)") end if %> bubbled up $5/8 to $21 7/8 after it said fiscal Q2 EPS were $0.36, beating last year's $0.25 mark and in line with Street estimates. Gross and operating margins both showed improvement of several percentage points over last year's numbers.
Charlotte-based personal telecommunications products and systems company Glenayre Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GEMS)") else Response.Write("(Nasdaq: GEMS)") end if %> jumped $7/16 to $6 9/16 after it said late yesterday that privately held BTI Telecom has chosen Glenayre's MVP modular voice processing system to complement its offering in competitive local exchange carrier (CLEC) markets in the southeastern U.S.
Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %>, a developer of Internet software and technologies for TV set-top boxes, network computers, and cellular phones, grabbed $7/8 to $14 1/4 after it said it has shipped version 3.1 of its Device Mosaic 3.1, a Web browser that can be integrated with digital cable, satellite, wireless and other non-PC products.<% ' AvantGo:End %>
<% ' AvantGo:Downs %>First Health Group Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FHCC)") else Response.Write("(Nasdaq: FHCC)") end if %>, which provides healthcare benefit services to businesses, fell $6 3/16 to $16 15/16 after reporting Q3 EPS of $0.35 versus $0.34 last year, missing the Street's mean estimate of $0.37. The company blamed the shortfall on lower-than-expected revenue from new clients and higher healthcare benefit and Year 2000 compliance expenses. Earnings in Q4 are expected to be "comparable" to the Q3 results, while EPS growth in fiscal 1999 is forecasted to be in "the low double digits."
Digital subscriber line (DSL) networking systems firm PairGain Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAIR)") else Response.Write("(Nasdaq: PAIR)") end if %> sank $2 to $11 5/8 after Stephens Inc. lowered its rating to "neutral" from "buy," a day after the company jumped 65% on takeover rumors. Another company that gained yesterday on merger rumors was telecommunications network capacity firm Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %>, which fell $2 3/4 to $19 1/16 this morning despite announcing a $23 million deal to supply the Enron Communications unit of Enron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENE)") else Response.Write("(NYSE: ENE)") end if %> with dense wavelength division multiplexing (DWDM) equipment.
Insurance brokerage firm Aon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOC)") else Response.Write("(NYSE: AOC)") end if %> was knocked down $4 3/16 to $56 15/16 after reporting Q3 EPS of $0.71 compared to $0.57 (before charges) a year ago and missing the Street's mean estimate of $0.77. The company said its Q4 earnings will be at the low end of the range expected by analysts, while earnings should grow by 10% in fiscal 1999. Analysts surveyed by First Call had been expecting fiscal 1999 EPS to grow by 12% from their estimates for fiscal 1998.
Genesis Health Ventures <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GHV)") else Response.Write("(NYSE: GHV)") end if %>, which provides healthcare services to the elderly, moved $4 9/16 lower to $10 1/4 after saying its fiscal Q4 EPS will be $0.16 to $0.18 below the $0.45 earned in Q3. About $0.05 of the decrease represents a non-cash charge to account for an expected change in the tax rate for its Multicare affiliate. The Street had been expecting EPS of $0.49 in the quarter. Credit Suisse First Boston cut its rating on the company to "hold" from "strong buy."
Credit card issuer MBNA Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRB)") else Response.Write("(NYSE: KRB)") end if %> slipped $1 7/8 to $21 7/16 after Merrill Lynch reduced its near-term rating to "neutral" from "buy," saying the company is "fully valued" relative to its estimated 20% near-term growth rate.
Financial services giant Citigroup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> slid $2 3/8 to $43 3/4 on concerns about possible strife among the newly formed company's management group following yesterday's resignation of top executive James Dimon.
Consumer credit products direct marketer Metris Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTRS)") else Response.Write("(Nasdaq: MTRS)") end if %> slid $4 3/4 to $32 after CFO Robert Oberrender resigned to take a new position at another company. Vice president and treasurer Paul Runice will take over the CFO duties until a permanent replacement is found, the company said.
Healthcare clinical and management information systems firm Cerner Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERN)") else Response.Write("(Nasdaq: CERN)") end if %> dropped $2 1/16 to $21 1/2 after Morgan Stanley Dean Witter lowered its rating to "neutral" from "outperform."<% ' AvantGo:End %>
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), another Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |